Socio-Economics & History Commentary

The chess moves have started. Since end of 2008, China has been signing quite a few currency swap agreements with its trading partners. This will make them less reliant on the USD.

I have said quite a few times, China will dump/sell its USD and treasuries. But it is doing it on the quiet to protect its value. Now it appears they are buying industrial metals like copper in a big way.

The Telegraph UK reports :
Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal.

China’s State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons. Nobu Su, head of Taiwan’s TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.

“China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years.”

“The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources,” he said.

The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass).

While it makes sense for China to take advantage of last year’s commodity crash to restock cheaply, there is clearly more behind the move. “They are definitely buying metals to diversify out of US Treasuries and dollar holdings,” said Jim Lennon, head of commodities at Macquarie Bank.

John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. “We’re very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China’s pockets are deep.”
……
One thing is clear: Beijing suspects that the US Federal Reserve is engineering a covert default on America’s debt by printing money. Premier Wen Jiabao issued a blunt warning last month that China was tiring of US bonds. “We have lent a huge amount of money to the US, so of course we are concerned about the safety of our assets,” he said.

This is slightly disingenuous. China has the world’s largest reserves – $1.95 trillion, mostly in dollars – because it has been holding down the yuan to boost exports. This mercantilist strategy has reached its limits.

The beauty of recycling China’s surplus into metals instead of US bonds is that it kills so many birds with one stone: it stops the yuan rising, without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; the holdings are likely to rise in value over time since the earth’s crust is gradually depleting its accessible ores. Above all, such a policy safeguards China’s industrial revolution, while the West may one day face a supply crisis.

Beijing may yet buy gold as well, although it has not done so yet. The gold share of reserves has fallen to 1pc, far below the historic norm in Asia. But if a metal-based currency ever emerges to end the reign of fiat paper, it is just as likely to be a “Copper Standard” as a “Gold Standard”.

There is no doubt China will buy gold. They have publicly announced they will buy something like 4000 tons for their reserves. The rumor going around is that they are negotiating with IMF on the purchase of 400 tons of gold IMF intends to sell. With US$2T to spend, I doubt they can spend it all on industrial metals. Compared to gold (at US$880/ounce), copper is about US$ 4900/ton. You have to buy alot alot of copper and have alot of storage space to use up US$2T. China’s strategy makes alot of sense. They are buying a variety of metals which they need. There is not enough gold for them if they decide to spend all US$2T on gold. Gold price will rocket when they start to buy.

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6 Comments

[…] to protect its value. Now it appears they are buying industrial metals like copper in a big way. China Switching Foreign Reserves from Treasuries to Industrial Metals? They cite the Telegraph UK A ‘Copper Standard’ for the world’s currency system? Note the quotes. […]

Could someone please explain to me why switching from US Dollars or from US$ denominated assets to copper devalues the chinese currency?

China throws dollars onto the world markets and thereby devalues the US$ and possibly other currencies…. that should drive their currency higher…

Comment by Cinquero |
April 18, 2009

Hi,

You are correct in saying that when China buys commodities with USD, they are effectively selling USD. And thus USD should go down in value. Similarly, if all countries decide to unload their USD, the USD will crash and be debased.

The problems is that many countries will opt to follow the devaluation of the USD to maintain their competitive advantage to boost their economies. Thus, competitive devaluaion will follow. If just 1 country say S. Korea opt for competitive devluation, it will make their cost so much more competitive compared to other
countries. This will boost their economy. This will add pressure to the surrounding countries to devalue their currencies.

rgds
mosesman

Comment by mosesman |
April 18, 2009

Ambrose Evans-Pritchard wrote: “But if a metal-based currency ever emerges to end the reign of fiat paper, it is just as likely to be a ‘Copper Standard’ as a ‘Gold Standard’.”

Copper rusts. Nickel does not rust. Per gram, nickel is more valuable than copper.

One disadvantage with gold as a standard is that it is too high-value for small-change circulation coin, unless low-percentage-gold alloys are used. Some people prefer purity, and pure gold is too soft for coins that circulate.

[…] mosesman put an intriguing blog post on China Switching Foreign Reserves from Treasuries to Industrial …Here’s a quick excerptChina’s State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons. Nobu Su, head of Taiwan’s TMT … […]